Safest way to manage money is to diversify

Everywhere I go I can feel the tension. People are naturally concerned about their investment portfolios but increasingly they're worried about the safety of their cash.

An elderly couple wrote me and asked the following:

"Can you help us understand the limits on insurance for CDs, money market accounts, and checking accounts in banks, savings and loans, and credit unions?"

With a number of major bank failures and takeovers, many people are wondering how much of their cash is protected.

On Oct. 3, President Bush signed the Emergency Economic Stabilization Act of 2008. That law raised the amount of money in bank and savings accounts that the Federal Deposit Insurance Corporation covers from $100,000 to $250,000 per depositor.

However, here's why you have to pay attention to all the fine details of the plans to "protect" our cash. The increase in the FDIC coverage is only temporary.

The basic FDIC deposit insurance limit will return to $100,000 after Dec. 31, 2009. The legislation did not increase coverage for retirement accounts, which continues to be $250,000.

If you have questions about FDIC coverage, go to www.myfdicinsurance.gov. On the site you will find EDIE, a calculator that will tell you how much of your cash is covered by the FDIC.

The new law also temporarily increased the insurance limit to $250,000 on accounts in federal credit unions and the majority of state-chartered credit unions.

Federal credit unions are regulated by the National Credit Union Administration, an independent federal agency. NCUA operates and manages the National Credit Union Share Insurance Fund, which insures the deposits of nearly 89 million accounts in all federal credit unions and the overwhelming majority of state-chartered credit unions.

Mutual funds

Before the FDIC limits were raised, the Treasury Department announced it would provide protection for cash stashed in money market mutual funds, which are offered by mutual fund companies. These funds are not the same as money market accounts offered by banks, which are FDIC-insured.

Under recently released details of this program, the federal government says it will guarantee to investors that they will receive $1 for each money market fund share held as of close of business on Sept. 19, 2008.

The program only covers money market funds that are regulated under Rule 2a-7 of the Investment Company Act of 1940, are publicly offered, are registered with the Securities and Exchange Commission, and maintain a stable share price of $1. This includes both taxable and nontaxable funds.

The guarantee will be triggered if a participating fund's net asset value falls below $0.995, commonly referred to as breaking the buck.

Ah, but here's another detail you need to know. The program will exist initially for three months, after which the secretary of the Treasury has the option to extend the program up to the close of business on Sept. 18, 2009.

If the program is extended, funds would have to renew their participation after each extension to maintain coverage. The program provides a guarantee on a fund-by-fund basis. In the event that a participating fund is liquidated, a guarantee payment should be made to investors in about 30 days, according to the Treasury Department. However, that payment promise is "subject to possible extensions at the discretion of the Treasury."

Zuccarelli said the Treasury Department is not releasing the names of fund companies that have enrolled in the program. I think they should.

"Investors need to contact their funds to see if they are participating," she said.

As of Oct. 3, the department had collected $69 million in fees for the guarantee program, Zuccarelli said.

Diversify, diversify

Personally, I've always diversified my cash holdings between various institutions. I've done that partly because I was raised by my grandmother, who lived through the Great Depression. I also spread my cash around because I don't like having all my money at one financial institution.

For our regular household accounts, my husband and I use a bank with a huge ATM network because we travel a lot. We have a credit union account where we keep cash for large purchases or major repairs. The cash in the credit union is also designated as our "Life Happens Fund." We created this fund so as not to drain our emergency cash, which we reserve for dire situations. We use a money market mutual fund account to hold some of our emergency cash.

With all these temporary government solutions, the word for the day is diversify. I just can't say that enough.